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External Analysis of Starbucks 1
External Analysis of Starbucks 1
Contents
1.0.0.
References .................................................................................................................................. 75
Starbucks is the global leader of the coffee industry in bringing new and innovative products to
market in convenient and easily accessible locations. This paper will provide a detailed analysis
of the coffee industry and the external environment which it operates in as well as a
comprehensive internal analysis aimed at specific evaluation of Starbucks and its performance.
Although Starbucks started from the humble beginnings of three friends that liked high
quality, premium roasted coffee it has since turned into a leader in the coffee industry. This is
due largely through the efforts and vision of Howard Schultz. His success and leadership of the
industry has been compared to what Ray Kroc did to McDonalds and the fast food industry.
Today Starbucks serves as a model that many other successful rivals try to emulate or improve
on. Starbucks is powered by their continual product innovation, customer service aptitude,
ability to expand globally, and successfully select locations.
Coffee and/or tea are consumed globally by most of the population. This coupled with
the forces that drive change in the industry result in a net positive force that makes the industry
attractive to businesses. An analysis utilizing Porters five-forces model outlining competitive
pressures will show that the coffee industry is able to provide for attractive profits by firms in the
industry. The overall competitive pressures are moderate and firms can be successful but they
will have to be efficient and effective in the strategies that they undertake or they risk being
removed from the industry by consumers.
Starbucks enjoys a favorable position in the strategic group that it is in. Starbucks has a
high priced, high quality product with a wide breadth of product offerings. They are the only
firm in this position. Most other firms offer moderate or few product offerings at a lower price
2.1.0. Background
Starbucks continues to change and innovate in the coffee industry. Over the last five
years Starbucks has continued to be successful firm in spite of pressures from economic realities
and competitors. Starbucks succeeds on three main fronts: financially, strategically, and
competitively. Table 1 on page 10 expresses the revenues and the percent change in revenues as
compared to the previous year for the last five full years:
Table 1: Starbucks Revenue Trends 2005-2010
Year
Total Revenues
Change in Revenues
2006
$7.8 Billion
22%
2007
$9.4 Billion
21%
2008
$10.4 Billion
10%
2009
$9.8 Billion
-6%
2010
$10.7 Billion
10%
Consumer attitudes
50-year trending
By age
By Age
Health messages
By coffee type
Coffee Origins/Certifications
Total, Traditional, Gourmet
Country associations
By Region
Certification awareness
Total, Traditional, Gourmet
Additives and Flavorings
By Time of Day
Breakout of additives by type and by age
By coffee type
Consumer Profiles
By Location
By age
Non-drinkers
By share of cups
Globalization
Product Differentiation
Societal Concerns
Coffee
Industry
Product
Innovation
, 2011
Coffee
Industry
Market size
Number of rivals
Scope of rivalry
Number of buyers
Differentiation
Product innovation
Demand-Supply
Technological change
Vertical integration
Economies of scale
Learning curves
% Growth
3.2%
3.7%
3.9%
4.0%
3.7%
source: Datamonitor
Million Kilograms
4,899.8
4,988.1
5,110.0
5,240.8
5,374.6
%
Growth
1.8%
2.4%
2.6%
2.6%
CAGR 2005-2009
2.3%
Source: Datamonitor
% Growth
-0.5%
2.2%
3.2%
3.1%
2.0%
source: Datamonitor
% Growth
-1.8%
2.2%
2.6%
2.2%
1.3%
Substitutes
WEAK
Suppliers
MODERATE
Rivalry among
Competing
Sellers
STRONG
Buyers
MODERATE
New Entrants
MODERATE
Source: Harold Brown, 2011
Firm
Starbucks
Dunkin Donuts
McDonald's
Green Mountain Coffee Roasters
Kraft Foods, Inc.
Nestle S.A.
Product line
Breadth
High
Moderate
Moderate
Low
Low
Low
Revenues (2010)
in Millions
10,707
5,500
2,400
803
3,100
17,700
% of Total Group
Revenues
27%
14%
6%
2%
8%
44%
High
Pri
ce
/Q
ua
lit
y
of
P
Starbucks
Green Mountain
Kraft
Nestle
McDs
Dunkin
Donuts
Low
Few Products
Many Products
Technology KSFs
Service KSFs
Distribution KSFs
Marketing KSFs
Other KSFs
Convenient locations
Ability to capture new market segments
Strategy
Corporate
Missionure
Structure
Organizational
Culture
Leadership
Products
and
Services
Image 2
Image 4
Starbucks now offers multiple ready-to-drink cold beverages like the espresso Double
Shot, bottled Frappuccino, and bottled coffee. Images 5 through 6 on page 45 depict these
Starbucks product offerings (Starbucks, 2011). These products are sold at Starbucks locations as
well as outside retailers like grocery stores, convenience stores, and concession counters.
Starbucks has also been successful in putting their own brand of ground coffee inside the big box
retail grocers. This coffee is bagged as ground or in whole bean form for the consumers that will
brew their own coffee at home or at work (Starbucks, 2011). The grocers now carry the VIA
ready brew product as well. VIA ready brew is instant coffee that just needs hot water added to
be able to enjoy the same renowned Starbucks taste virtually anywhere (Starbucks, 2010).
Images 7 through 9 on page 45 display the grocery coffee offerings from Starbucks.
Image 7
Image 6
Image 8
Image 9
Starbucks offers a wide range of food products as well as just the beverage service.
These food items are breakfast sandwiches and oatmeal, lunch sandwiches, and sweets. These
Sweets are a variety of cakes, cookies, and cupcakes (Starbucks, 2011). Images 10 through 15
on page 46 show a sample of the food items that Starbucks offers.
Image 12
Image 14
Image 11
Image 13
Image 15
4.1.3. Leadership
Leadership is defined by using a three prong test that requires the authoritative position or
office of a leader, the capacity of the individual to lead, and the actual act of leading (MerriamWebster, 2011). The undeniable leader of Starbucks is Howard Schultz, who after an eight year
hiatus returned to the CEO position and Chairman of the Board at Starbucks. Starbucks was
4.1.5. Structure
There are two main types of organizational structure that most business falls under. The
first is a departmental organizational structure which is appropriate for most single line of
business firms. The second is a divisional organizational structure, also referred to as
geographical organizational structure, that is adopted by diversified companies (Gamble &
Thompson, Jr., 2011). Starbucks utilizes a divisional organizational structure, meaning that it
employs dedicated people, using dedicated machines, in dedicated markets. Case in point,
Starbucks has a president of its coffee division for both the U.S. market and for the international
market (Starbucks, 2011).
The other key facet of Starbucks organizational structure is that they decentralize
decision making. This means that Starbucks pushes down decision making to the lowest
organizational level capable of making a timely, informed, competent decision (Gamble &
Thompson, Jr., 2011). The danger of decentralized decision making is that the company must
maintain adequate control over the actions of employees so that the business is not put in risk.
Starbucks is able to maintain this control by treating employees as partners and making sure that
they are treated well and taken care of (www.starbucks.com, 2011).
Best Cost
Provider Strategy
Focused Low-Cost Provider
Strategy
Focused Differentiation
Strategy
Build an
organization
capable of
successful
strategy
execution
Exerting strong
leadership to
drive executution
Allowcate ample
resources to
critical activities
Action Agenda
for
Implementing
and Executing
Strategy
Instilling
corporate culture
that promotes
good strategy
execution
Institute policies
and procedures
that facilite
strategy
execution
Install systems
that enable
company
personnel to
carry out
strategic roles
assets including retail location and warehouse property, coffee roasting facilities and
machineries, inventory, brewing machines, and transportation equipment. All of these tangible
assets are critical for Starbucks to perform its operations. Starbucks also maintains a large
amount of cash and cash equivalents on its balance sheet (GlobalData, 2010).
4.1.8.3. Capabilities
Management needs to consider competitive capabilities when crafting strategy. These
types of capabilities include skills and specialized expertise, valuable physical assets, valuable
25.34
2.41
27,005
Total Revenue
Operating Income
Basic EPS Excl Extraord Items
Cash from Operating Activities
Free Cash Flow
Total Assets
Total Liabilities
Total Long Term Debt
Annual
Year End
3-Oct-10
10,707.40
1,419.40
1.27
1,704.90
1,264.20
6,385.90
2,711.20
549.4
1 Year
Growth
3 Year
Growth
5 Year
Growth
9.54%
152.56%
140.13%
22.74%
34.00%
14.51%
7.12%
0.02%
4.39%
10.43%
12.29%
8.60%
71.44%
6.12%
-3.95%
-0.04%
10.95%
12.71%
15.20%
13.06%
35.22%
12.69%
13.75%
186.02%
Profitability Ratios
Gross Margin
Operating Margin
Pretax Margin
Net Profit Margin
3-Oct-10
27-Sep-09
28-Sep-08
30-Sep-07
1-Oct-06
25.19%
13.26%
13.42%
8.83%
20.71%
5.75%
5.73%
4.00%
19.19%
4.85%
4.39%
3.04%
23.34%
11.20%
11.22%
7.15%
24.66%
11.48%
11.64%
7.47%
UpdateType/Date
Filed Currency
Exchange Rate
Auditor
Auditor Opinion
03-Oct2010
Updated
Normal
03-Oct2010
USD
1
Deloitte &
Touche
LLP
27-Sep2009
Updated
Normal
27-Sep2009
USD
1
Deloitte &
Touche
LLP
28-Sep2008
Updated
Normal
28-Sep2008
USD
1
Deloitte &
Touche
LLP
30-Sep01-Oct2007
2006
Updated
Updated
Normal
Normal
30-Sep01-Oct2007
2006
USD
USD
1
1
Deloitte & Deloitte &
Touche
Touche
LLP
LLP
Unqualified Unqualified
Unqualified Unqualified Unqualified
with
with
1,164.0
285.7
1,449.7
306.0
-3.3
302.7
302.7
95.1
238.3
209.9
543.3
156.5
304.2
304.2
2,756.4
599.8
66.3
666.1
276.0
-5.0
271.0
271.0
76.7
381.6
206.6
664.9
147.2
286.6
286.6
2,035.8
269.8
52.5
322.3
334.0
-4.5
329.5
329.5
89.6
377.7
225.5
692.8
169.2
234.2
234.2
1,748.0
281.3
157.4
438.7
291.1
-3.2
287.9
287.9
88.6
339.4
263.6
691.7
148.8
129.5
129.5
1,696.5
312.6
141.0
453.6
228.1
-3.8
224.3
224.3
80.2
328.1
228.0
636.2
126.9
88.8
88.8
1,529.8
Buildings
Land/Improvements
Machinery/Equipment
Construction in Progress
Property/Plant/Equipment Gross
Accumulated Depreciation
Property/Plant/Equipment Net
Goodwill, Net
Intangibles Gross
Accumulated Intangible Amortization
Intangibles, Net
LT Investment - Affiliate Companies
LT Investments Other
Long Term Investments
Other Long Term Assets
Other Long Term Assets, Total
Total Assets
3,701.3
58.0
1,955.8
173.6
5,888.7
-3,472.2
2,416.5
262.4
79.6
-8.8
70.8
341.5
191.8
533.3
346.5
346.5
6,385.9
3,580.5
58.2
1,943.0
119.2
5,700.9
-3,164.5
2,536.4
259.1
75.8
-7.6
68.2
352.3
71.2
423.5
253.8
253.8
5,576.8
3,580.8
59.1
1,783.8
293.6
5,717.3
-2,760.9
2,956.4
266.5
72.5
-5.9
66.6
302.6
71.4
374.0
261.1
261.1
5,672.6
3,264.9
56.2
1,770.2
215.3
5,306.6
-2,416.1
2,890.4
215.6
42.0
258.8
21.0
279.9
219.4
219.4
5,343.9
2,545.6
32.4
1,504.7
175.0
4,257.7
-1,969.8
2,287.9
161.5
38.0
219.1
5.8
224.9
186.9
186.9
4,428.9
282.6
836.0
0.0
267.1
642.9
0.0
324.9
554.1
713.0
390.8
664.3
710.2
340.9
568.0
700.0
0.2
0.7
0.8
0.8
414.1
100.2
146.2
388.7
127.8
154.3
368.4
76.1
152.5
296.9
92.5
-
231.9
94.0
-
Accounts Payable
Accrued Expenses
Notes Payable/Short Term Debt
Current Portion - Long Term Debt/Capital
Leases
Customer Advances
Income Taxes Payable
Other Current Liabilities
660.5
1,779.1
670.8
1,581.0
597.0
2,189.7
389.4
2,155.6
325.9
1,935.6
549.4
549.4
549.4
549.3
549.3
549.5
549.6
549.6
1,263.3
550.1
550.1
1,261.1
2.0
2.0
702.7
Minority Interest
Reserves
Other Long Term Liabilities
Other Liabilities, Total
Total Liabilities
7.6
47.7
327.4
375.1
2,711.2
11.2
43.4
346.2
389.6
2,531.1
18.3
44.6
379.5
424.1
3,181.7
17.3
43.7
293.2
336.8
3,059.8
10.7
34.3
217.8
252.1
2,200.4
Common Stock
Common Stock
Additional Paid-In Capital
Retained Earnings (Accumulated Deficit)
Other Comprehensive Income
Other Equity, Total
Total Equity
0.7
0.7
145.6
3,471.2
57.2
57.2
3,674.7
0.7
0.7
186.4
2,793.2
65.4
65.4
3,045.7
0.7
0.7
39.4
2,402.4
48.4
48.4
2,490.9
0.7
0.7
39.4
2,189.4
54.6
54.6
2,284.1
0.8
0.8
39.4
2,151.1
37.3
37.3
2,228.5
6,385.9
5,576.8
5,672.6
5,343.9
4,428.9
5.1.0. Strengths
The strengths of Starbucks come from an internal origin and are designated as helpful to
Starbucks reaching its target objectives. Starbucks must leverage these strengths to overcome
their weaknesses and realize potential opportunities. Starbucks maintains a wide product and
brand offerings to its consumer base. This is what leads to Starbucks brand strength, which is
considered to be the core strength of the company (Datamonitor, 2010). Starbucks has a
reputation globally as the brand that offers the highest quality of coffee along with a superior
customer service experience (Datamonitor, 2010).
Starbucks also maintains strengths in its store operations and its sound financial
performance. Starbucks sells its products through retail stores and licensed locations which
allow for strong financial performance. With the 17,000 plus retail locations, Starbucks has been
5.2.0. Weaknesses
Weaknesses for Starbucks in the SWOT analysis are also from an internal origin and are
categorized as operational areas and activities that reduce Starbucks being able to achieve
strategy execution. The first weakness for Starbucks is with their overdependence on the U.S.
market for revenues (GlobalData, 2010). The majority of Starbuckss locations are in the U.S.
market, which has allowed for brand dominance but slowed per store revenue increases as rival
firms have also aggressively expanded within the U.S. market (www.businessteacher.org, 2011).
This has led to the raise of the second of Starbucks weaknesses, a decline in market
shares (GlobalData, 2010). The company's compounded annual growth rate (CAGR) for
revenue was 11.3% during 2005-2009, which is below the S&P 500 companies average of
12.74%. A lower than S&P 500 companies average revenue CAGR implies that the company has
underperformed the average S&P 500 companies growth and lost market share over the last four
years (GlobalData, 2010).
Starbucks has also had several product recalls and one class action lawsuit levied against
it in recent years. Both of these instances weaken consumer trust and significantly erode brand
power (Datamonitor, 2010). The most recent product recalls were for a coffee grinder with a
laceration hazard potential (Allison, 2009) and glass water bottles that had the potential to shatter
and cause lacerations (Starbucks, 2010).
5.4.0. Threats
Threats are areas of concern in the external environment that can affect how Starbucks,
and the coffee industry as a whole, will do business. Industry wide the completion is very
intense and unless Starbucks can expand outside of the saturated U.S. market and find new
consumers, then market share may continue to drop (Datamonitor, 2010). Government
regulation also looms as a possible threat as an increase in regulation by the governments of
either importing or exporting countries will have a ripple effect throughout the coffee industry.
6.0.0. Recommendations
The third question to answer in the strategic management that all firms need to answer
are how are we going to get there (Gamble & Thompson, Jr., 2011). This centers on the
strategic initiatives that Starbucks should undertake in an effort to improve sales and market
position. Two recommendations will be given, the first will answer what Starbucks needs to do
the respond to market and competitive forces in the external environment, and the second
recommendation will answer what Starbucks needs to do to utilize their collective internal
strengths to overcome their internal weaknesses to realize present opportunities.
Conclusion
In conclusion, although Starbucks may have started from the humble beginnings of three
friends that liked high quality, premium roasted coffee it has since turned into a leader in the
coffee industry. This is due largely through the efforts and vision of Howard Schultz. His
success and leadership of the industry has been compared to what Ray Kroc did to McDonalds
and the fast food industry. Today Starbucks serves as a model that many other successful rivals
try to emulate or improve on. Starbucks is powered by their continual product innovation,
customer service aptitude, ability to expand globally, and successfully select locations.
Coffee and/or tea are consumed globally by most of the population. This coupled with
the forces that drive change in the industry result in a net positive force that makes the industry
attractive to businesses. An analysis utilizing Porters five-forces model outlining competitive
pressures will show that the coffee industry is able to provide for attractive profits by firms in the
industry. The overall competitive pressures are moderate and firms can be successful but they
will have to be efficient and effective in the strategies that they undertake or they risk being
removed from the industry by consumers.
Starbucks enjoys a favorable position in the strategic group that it is in. Starbucks has a
high priced, high quality product with a wide breadth of product offerings. They are the only
firm in this position. Most other firms offer moderate or few product offerings at a lower price
point. Starbucks has been able to build its brand image and market power while in this position
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